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Business Strategies for Improving your 401(k) Plan

Contributed by BTA Associates
Author: Guy Baker, MBA, MSFS, CFP, MSM

 


What the Experts are Saying . . .  

  • All investment options, when measured by asset class are virtually the same. The main difference is the expense loads.

  • The average 401(k) plan costs a minimum of $75 per participant to administer.

  • Most plans price the administration fees to increase as assets increase.

  • Most 401(k) expenses are hidden from the buyer’s view.

  • Most HCE can not put away more than 5% of pay.

  • The ADP Highly Compensated tests are only the tip of the compliance issues.

  • The biggest problem facing America’s worker’s is retirement and they don’t even know it

  • As more companies outsource their HR Department, one of the most important features of a 401(k) is the amount of service the company must provide to make it viable

  • Most trustees have no quantitative way to avoid fiduciary liability for investment selection.

Do you have an efficient 401(k)?

Who would know? Virtually nobody can give a specific answer to that question. Why? Because most of the executive staff responsible for analyzing the various factors which make up the 401(k) puzzle are purposely confused by the vendors.

There are 5 basic elements to every 401(k) plan. (1) Administration (2) Compliance (3) Employee education (4) Investment Selection and (5) Total Cost. Unless you can identify the key issues and know your comparative position, how could anyone give a reasonable answer to this question? Yet, everyday, HR Directors and CFO’s make being forced to make buying decisions - usually based on "who they like" and "who they trust." This is not a bad criteria if you buying a house, but if it is the ONLY criteria, it could open you and your company up for tremendous liability and cost.

The Problem

Frankly, from my perspective, the 401(k) industry has purposely confused the corporate buyer. They have deliberately hidden the real cost of these plans and wrapped them in beautiful graphics. The average 401(k) plan cost more than 2% of assets annually plus a nominal administration fee. This 100% - 150% more than the true cost of the plan.

The biggest problem facing the average American worker is retirement. And what is happening? Vendors are systematically overcharging the average participant nearly 17%. That’s ridiculous. Consider this: The average participant might put in $2500 per year. If they can earn 9% gross on their money from age 35 to age 65, they will accumulate $373,000. If they have to pay 2% for asset management fees and other expenses, they will pay $118,000. That’s nearly one third of their gain in expenses. Anything we can do to reduce that only increases their retirement income. Say you could reduce that by 50%. That would mean an extra $500 per month of retirement income.

The Solution

Obviously, no solution is simple. But it starts with understanding the basic issues and the possible alternatives you can consider. Let’s look at each element, one at a time.

Administration

Not all 401(k) have been created equal. While on the surface an automatic response system may sound similar, the inner workings of the system, the updating, the coordination of data, the reporting and timing can be quite different. There are at least 20 issues which need to be considered before a vendor can be found worthy.

Compliance

Most every vendor will tell you they will keep you in compliance. But do they? There are 15 tests which need to conducted to determine if a plan is in compliance. While all of these tests are not relevant to every company - who is asking the questions? We have found companies out of compliance because no one bothered to ask the right questions.

Employee Education

This is the Achilles heel of the industry. In an effort to reduce costs, most vendors have cut back in this area. They have a one time enrollment meeting and then expect the company to conduct future education meetings. This is called train the trainer. Only a hand-full of vendors have trained, competent presenters who can assist the employees in the enrollment process. But what about future education. Who is helping employees answer the two great question of life? What do I have? and What do I need? Unless the education program transcends the enrollment process, the employees are being short changed.

Investment Selection

Most every vendor offers a wide array of investment choices. But do they meet the 404 (c) guidelines? Are the funds in different asset classes or the same asset classes? Are they retail or wholesale? Do they have high turnover or low turnover? Is their style drift? More important, who is making the decision on which funds to use? The trustees are responsible for determining the answers to these questions. Who is doing the research? Who is making the recommendation?

Total Cost

Finally the most dramatic of the issues - cost. It is easy to believe that your plan is inexpensive. All you have to do is look at the administration fee you are paying. Most plans charge $15- $20 for administration. Yet the true cost is nearly $75. I guess they must be giving it away. Hardly!!! The administration is paid for by additional costs added to the investments. Unless you know how to identify these costs, measure these costs and eliminate them, your plan will pay $300,000 - $2,000,000 more in FEES than it has to pay over the next 10 years. This is incredible you might say. Just do the math. If a plan has $1,000,000 in assets today, how much would it likely have in 10 years? Maybe $3,000,000? The excess fees could easily be $7500 the first year and grow to $30,000 by the 10th year. Add those up and apply an interest factor. It could easily be $300,000.

What to do?

First, someone has to decide it is worth it to do something. But assuming it is, we suggest doing an audit. Find out what your plan costs and how it stacks up with a "benchmark" plan. Find out if you have a state of the art plan or are you missing out on new technology that could reduce your employee costs? A simple audit will tell you exactly where you stand and what you need to do to overcome any problems you may have with your plant. Hopefully, you have a great plan. If so, the audit will confirm what you already know. If you don’t then the audit will show you areas of deficiency to improve your plan.


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